Is My Money Safe?
Is My Money Safe?
Posted March 16, 2023 by Ben Carlson
A reader asks: If a brokerage fails, what happens to a customer’s holdings there?
Another reader asks: My wife and I have the bulk of our investments (401k & trading) in basically 2 accounts. Is this a dumb practice? Should we be more ‘diversified’ with our institutions? We’ve been discussing this for a while, and then with SVB, it’s definitely brought the discussion back to the kitchen table. Understood that FDIC insures up to $250k, but once you get north of that, any best practices for what to do?
Still another reader wants to know:
The Federal Home Loan Bank (FHLB) of San Francisco has a lot of exposure to SVB and other similar banks based on public SEC filings ($30 billion to $50 billion by my count). My money market fund had approximately 20% of its holdings in FHLB securities as of February 28th. Should I be concerned? I understand FHLB is a GSE, just like Fannie and Freddie who I’m sure you remember from the GFC. The second largest bank failure in US history is enough of a low probability event for me – just want your thoughts on if I should be concerned with other low probability events like something non-crypto breaking the buck because of SVB?
Here’s one more:
I’m considering keeping our emergency fund in a money market fund. Is this too risky with out it having FDIC insurance?
You get the idea.
There were a lot of questions like that this week.
People are worried about the safety of their money and it’s not something they ever really thought they would have to worry about.
Carl Richards once wrote, “Risk is what’s left over after you think you’ve thought of everything.”
The true risks are never really known ahead of time.
No one had a bank run as the biggest risk to the financial system in their 2023 outlooks. A Wall Street strategist writes an annual outlook and God laughs.
There are plenty of known risks when you invest — inflation, deflation, recessions, rising interest rates, falling interest rates, bear markets, crashes, losses, etc.
No one can predict these things in advance but this is what you sign up for when putting your money to work in risk assets.
When you sign up for a bank account you’re not planning on taking any risk. This is why bank accounts don’t pay nearly as much as stocks or bonds. In fact, most bank accounts don’t pay you anything.
No one really worries about the money they have in the bank. And while plenty of investors worry about the performance of their portfolio, few people ever worry about the financial institutions that custody their assets.
The finance industry likes to quantify risks through measures such as standard deviation, tracking error, alpha, risk-adjusted returns and various ratios.
Most normal people care more about qualitative risks that aren’t easy to quantify:
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